Now more than ever, legislative and regulatory decisions play a major role in the way PHCP and PVF distributors conduct business.
A blue-chip panel of distributors had plenty to say about that and many other hot-button topics during an exclusive roundtable interview conducted by Supply House Times and the American Supply Association during NetworkASA 2013 at the Renaissance Marriott DC Downtown Hotel in Washington. The Oct. 2 interview was conducted during the government shutdown and a day before ASA member distributors went to Capitol Hill to meet with their members of Congress about some of the same issues discussed during this hour-long session. This year’s roundtable panel featured:
• Pat McGowan, President, Thos. Somerville, Upper Marlboro, Md.;
• Bill Condron, COO, The Granite Group, Concord, N.H.;
• Todd Ford, President/CEO, Central States Group, Omaha, Neb.;
• Stan Allen, President, Morrison Supply Co., Fort Worth, Texas;
• Jeff Worly, President/COO, Worly Plumbing Supply, Columbus, Ohio.
In addition to legislative and regulatory issues, other topics discussed included attracting new talent to the industry, e-commerce, buying groups and candid comments on the current state of ASA. This interview will run in two parts, with the second installment appearing in the February issue of Supply House Times.
Question: How is your confidence in a steadying and improving economy or are you still concerned about slippage?
Panelists answered this question anecdotally based on their specific region, but as a group agreed one factor is providing a somewhat cloudy outlook on what is an otherwise improving economic situation.
“In our Mid-Atlantic area, we feel there are a lot of opportunities,” McGowan said. “The biggest problem is the uncertainty in where we are going as a country. We have a lot of pent-up demand in the greater Washington area, but we’re still dealing with the ups and downs. Unemployment remains weak, health care still is a big issue and we’re still dealing with entitlement programs. As a country, we haven’t confronted those issues.”
Ford noted business in the Midwest is pointing upward, especially on the industrial side. But again, that good news comes with an asterisk. “Unemployment in our region is good relative to the rest of the country and industrial business is as strong as it has ever been,” he said. “End users are spending a lot of money for upgrades and new projects and that will continue to be strong. The underlying numbers show this is a really positive time, but it’s that uncertainty in Washington that has everybody back and waiting.”
Worly said multifamily housing in the Ohio area continues to be a major source of revenue, but that positive momentum is being somewhat dampened by the current political upheaval. “For instance, there are 13,000 apartments being built in the Columbus area between now and the end of 2014,” he said. “Multifamily is very strong, but the private sector is waiting to see which direction we are going to go as a country, which will help the entire construction industry.”
Condron added: “If you tune out the government piece and look at the underlying fundamentals of our business, it’s pretty good right now. It’s certainly better than it has been in quite some time. Looking at the numbers year over year, you are seeing things improve. I think there definitely is less fear of the economy sliding back and more belief in a steady growth rate. But with everything going on in Washington, it’s not as robust as it should or could be and that’s one reason why you are seeing this slow, unsatisfying recovery.”
Question: Over the past few years, access to capital to expand has been tough to come by. Do you see an easing by the banks with capital availability?
The panel agreed the current lending situation has not dramatically improved over the last year or so. “It’s going to continue how it is until we get some answers in Washington,” Ford said.
McGowan added: “The banks got beat up. If you go to a bank today, you better have a darn good plan and not a lot of high risk and you better add security to that.”
“Banks might give you what you want, but you might not like the terms,” Worly noted. “I know a lot of people with excellent credit who went to the bank and couldn’t get a refinance on their buildings.”
The topic of private equity investment made its way into the banking discussion. “We get letters and calls daily from people saying they have money and can help us,” Ford said.
Morrison Supply, which has backing from a private equity firm, sees the reverse of what Ford described.
“People call us and ask about being acquired,” Allen said. “It usually has to do with no succession planning or they cannot get financing. A gentleman called us and said his business is getting busier and he cannot carry the receivables and payables, and had a customer file for bankruptcy. He said he needed working capital to fuel his business and if we purchased his company he could continue doing what he’s doing.
“Folks are getting tired. They have dipped into their personal wealth and cannot get that availability of credit and are at their wit’s end. They get busier and cannot purchase the needed material and it becomes a vicious cycle. I think our industry would do a lot better if it could have access to more capital.”
Worly said a fix to the problem may reside in a company’s own backyard. “Successful companies are able to manage their own business,” he said. “That’s the way you generate capital. Operationally, do the right things.”
Question: Has health care caused you to be concerned and act differently? Does President Obama pushing back the employer mandate until 2015 make you act differently?
Allen summed up the panel’s feeling on the issue of the current state of health care. “It causes extreme heartburn,” he said.
McGowan said it would be easy for companies from a pure business standpoint to simply drop their health-care plans and pay the federal penalty for doing so.
“We can’t do that,” he stressed. “We run a family business and we want to take care of these people and make sure their families are taken care of. Health care is extremely important to our employees.”
Worly added: “Unfortunately it’s here and we have to abide by the law. It goes back to taking care of your people. You can’t get rid of health insurance as a benefit. How could you sleep at night? Hopefully there will be a different solution down the road.”
Ford added his company has been proactive in keeping its employees informed on the various twists and turns with the new health-care regulations, but has been stymied by the changing information coming out of Washington.
“We’ll have meetings and a hand will go up and we don’t know the answer to it and have to tell them we’ll get back to them with the answer,” he said. “There is some confusion and fear with our people and we’ve had all sorts of folks come in and talk to our people. Once again, the problem is uncertainty.”
Question: It’s been reported online sellers have a 7-10% price advantage over traditional wholesalers since they do not have to charge sales tax. ASA was instrumental in getting the Marketplace Fairness Act passed in the Senate. If they can get it passed in the House and signed by the president, will that ease the threat from online sellers?
Allen used the example of his daughter to drive home a point about the continuing proliferation of e-commerce.
“My daughter will go to the store and look at something, come back home and shop it for a cheaper price on the Internet and buy it,” he said. “The Marketplace Fairness Act will put a little pause in it, but I do not think it will deter online shopping. My feeling is it will continue to get stronger.”
McGowan noted big boxes such as Amazon will continue to be a formidable presence, but added the sales-tax issue presents an additional concern.
“When we are going to sell a simple faucet and somebody buys it online in a place where they don’t have sales tax vs. a place where they do, that’s a problem,” he said. “California’s sales tax is up there and in Maryland its 6%. The differential is there, no question. The big box is going to be there and will be a threat to our businesses. All I ask is you put us on the same playing field at the same time you are helping states get their money.”
Condron and Ford feel distributors are able to overcome obstacles such as e-commerce because of the relationships they have built with customers over the years.
“Target, Best Buy and other companies are worried about becoming showrooms for Amazon,” Condron said. “That’s a real concern. In our business, I think that just forces you to focus on the relationships you have with your core customers — the ones who value the expertise of your people, the service you offer, the products you provide and the credit you extend. All these things wrapped up in one can offset the online option. You can’t be blind to e-commerce and everything that’s going on with it. In fact, it has a place in our business as a way to help our customers order from us more efficiently. If you focus on providing value to your core customer over the Web or over the counter, you can succeed. There is a place here for us.”
Ford added: “During the recession we didn’t have a lot of distributors go out of business. We will withstand this again. We have relationships that have value. If it was just about product, we would have been out of business a long time ago. E-commerce levels the playing field a little, but I don’t think it will be a differentiator.”
Question: Do you feel there is too much, too little or just the right amount of government regulation in our industry today?
Allen noted the new no-lead law and recent refrigerant regulations have affected Morrison’s business.
“We are going to write off a substantial amount of leaded product,” he said. “Why cannot I sell the rest of (the leaded product) and then have a date where it cannot be manufactured anymore? There are different R-13 and R-14 efficiency regulations for HVAC equipment proposed now by regions throughout the country. These changes affect people all the way through the channel. Sometimes I do not think government cares or realizes what it has created.”
Condron added: “It’s the lack of clarity to the regulations themselves. If the government clearly laid out the rules and then got out of the way, businesses would figure out how to succeed.”
Worly feels too much regulation could have a snowball effect beyond the PHCP and PVF industry. “If you begin to choke off the small business it will have a horrible effect on the economy,” he said. “We sell to mechanical contractors who then sell to general contractors whose ultimate client is the owner. If those guys lose confidence, it’s a domino effect none of us want to see.”
McGowan added: “Regulation is good, but only to a certain extent. We need some regulation, but not anywhere near what we have today.”
Question: If you could be king for a day in Washington and make one decision that would be passed, what would you do to improve the economy and create jobs?
Worly said his lone request would be for the government to take a few steps back. “Stay out of businesses’ way,” he said. “Small business is the catalyst that runs this country. Let us do what we’re good at doing. We seem to have been successful as an industry over the years.”
Condron and Ford both would love to see a concrete fiscal plan in place that would foster confidence in the business community.
“It would be nice to see a balanced plan where both sides shared some sacrifices,” Condron said. “Businesses need to see there is a plan and not just this stop, start and punt all the time. There is capital available and there is pent-up demand. If we had a balanced solution that lasted longer than just the next manufactured deadline, we could grow our businesses, hire more people and the overall economy would thrive. The constant uncertainty is what is holding people back.”
Ford added: “We’re all charged with paying expenses and making money to offset those expenses. I have no confidence that Washington in general understands that. We have to do that every day or we’ll go out of business or have to go to the bank to get a loan. They spend and spend. There is no end game. I would like to see a balanced budget that would give us some sort of feeling inside that they know how to run a business.”
Next month roundtable participants will talk about their hiring plans and strategies, new innovations that are saving their companies money, the importance of attracting young workers in the industry, buying groups and their thoughts on ASA’s value to the industry.